Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Wednesday, April 3, 2013

That Fax Machine Must Have Had Some Kind of Impact!

It seems that Paul Krugman's past statements continue to crop up. His 2003 call for Alan Greenspan to create a housing bubble certainly has dogged him, but something he wrote in 1998 exposes even more of his economic ignorance: He claimed that the Internet would not have much effect on commerce and the economy, or at least be no more powerful than the fax machine.

Specifically, he wrote:

The growth of the Internet will slow drastically, as the flaw in "Metcalfe's law" -- which states that the number of potential connections in a network is proportional to the square of the number of participants -- becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's. (Emphasis mine)

As the rate of technological change in computing slows, the number of jobs for IT specialists will decelerate, then actually turn down; ten years from now, the phrase information economy will sound silly.

At one level, his statement is understandable. There are diminishing returns to any kind of technological progress and diminishing returns to capital. Even Keynesians like Krugman can grasp the concept of the margin, even if they cannot apply that concept to money and government spending.

My sense also is that Krugman was responding to some of the "New Economy" rhetoric that was floating about at the time. (Although Democrats were claiming then that pushing the top tax rate to 39.6 percent was the real reason the economy was doing well.)

However, it is quite clear now that the Internet has had a huge impact upon the economy, and that is because it not only has changed how people receive economic information, it also has vastly changed the extent of what we would call "the market." For example, a local bookstore in Frostburg now does not have to depend upon walk-in traffic for all its revenue, as it can market its products to almost anyone on the Internet.

Like most academic economists, Krugman depends upon static models that give us the four kinds of "competition," models that over time will slowly morph into every industry turning into an intractable monopoly. Unless the government steps in to stop this inevitable slide, economic competition will disappear.

Those models were what enabled Oskar Lange and others who were debating Ludwig von Mises and Friedrich A. Hayek in what is called the "Socialist Calculation Debate." Lange and his allies were claiming that all anyone needed were the four models, and that a government, through central planning, essentially could recreate a market that would be better than what currently existed because governments could enforce those things that would better allow the economy to remain in a state of virtual perfect competition.

That is where Krugman and most other academic economists are today. They cannot fully articulate the role of private property and even prices in an economy, and they certainly cannot fully understand the role of information and even those things they call "market failures" because they cannot comprehend the entrepreneur and the economic role of the entrepreneur.

To Paul Krugman, the entrepreneur is someone who starts a business in the garage, but over time has little economic impact because all the important economic decisions are made by big companies that bear little resemblance to any competitive models. Instead, like many academic economists, he is stuck in the mentality exhibited by John Kenneth Galbraith when he likened the economy to consisting of a few monopolies that competed in a death match with labor unions. Prices don't mean anything because they are administered and because the economy does not exactly match the model of perfect competition and all its inherent assumptions.

Furthermore, Krugman's regulatory models are purely Pigovian in which the wise, omniscient regulator (if the regulator is a Democrat) knows exactly what lines of production are going to be profitable and sustainable (Industrial Policy), so the fact that the Internet could have a huge impact upon information costs is irrelevant.

In short, Paul Krugman sees the economy as a mechanistic entity that is oiled by a circular flow of money. As long as government regulators and central bankers have a free hand, that machine can go on forever, but if private enterprise gets in the way -- as it invariably does -- then disaster strikes.

Thus, a person who views the economy that way is not going to be able to understand the impact of something like the Internet, which to him is a static entity that will be giving decreasing returns to scale. His 1998 statement was his economic logic in action.

24 comments:

In reading Krugman's original post, I'm reminded of Peter Thiel's comments about technological progress: "They promised us flying cars but we got 140 characters," referring to twitter. It woukd be instructive to examine the way in which regulatory and tax policy may be part of, or even *the* reason why some of these deeper technological, productivity, and quality-of-life advancements have not come to pass. Keynesians obsess about the consumer, but then fail to recognize the mechanism by which consumer goods are made available.

This is a great post, but really is not a dig against Krugman. He, like most of the self appointed "top" economists are victims of a failed university system. As someone who needs to hire economists I am at the mercy of the group-think that prevails in academic economics. I can barely find a graduate from even a masters program who even knows who Adam Smith was, much less anything about Schumpeter, or Mill. If you don't understand the basic underpinnings of a field of study, your complex modeling skills are useless.

All of these people learn the same Keynesian crap (not knowing its even Keynes). They know nothing about markets, much less how to communicate about economics. It really frustrates me since I need to retrain them once they start at my firm.

Groupthink leads to bad decisions. This is true in any field. Until we actually start teaching people about economics, they will continue to turn to populists like Krugman and Bernanke even though they are empty vessels.

The prime reason a lot of the technological "promises" of futurists in the 1960s haven't arrived is Energy cost. IT en Telecom is relatively low in energy demand in comparison to the economic value those technologies added.

As the recent changes due to shale gas/oil show, this isn't that much related to regulatory and tax policy.

The American Shale Oil/Gas boom is due to the fact that Americans privately own the resources below their land. As a result private persons in the US have a lot of reasons to start exploiting those resources.

In Europe and many other countries around the world everything in the ground is government property. They aren't agressively pushing shale oil/gas. Why shouldn't they. They risk damage to their homes without seeing benefits stuffing their pockets.

You do see industries returning to the USA now due to cheaper energy.Natural gas is difficult to ship around the world. It requires pipelines and is therefore a resource of more or less continental relevance and hence now creates a cost difference in doing energy intensive business.

@Anonymous Sure, on a micro level, I agree: the *specific* predictions can be fanciful. Nonetheless, in terms of the larger picture, which, to me, is improvements in life quality and net gains of value creation given scarce resources, might it be the case that the backward-looking nature of the regulatory process has hampered the forward progress of technology? Sometimes I think nuclear power was the greatest bait-and-switch ever. Use government to encourage development of a technology so risk-ridden that no truly private enterprise would take it on, and then its detractors can claim that its obvious and irretrievable costs demonstrate the need to consider every possible eventuality before pursuing technological (or any) innovation. More gravy for regulators! Win!

Good point about nuke power, Sarah. What happened was that post-World War II when people were starting to push nuclear power, U.S. insurance companies could not underwrite nuclear plants because state laws required there to be a history of whatever was insured (laws from the Progressive Era), and nuclear power was brand new.

Thus, Congress gave us the Price-Anderson Act, which made the government the "insurance" underwriter. The act also created the Nuclear Regulatory Commission to oversee nuclear power.

Keynesians obsess about the consumer, but then fail to recognize the mechanism by which consumer goods are made available.

It seems to me that it's really worse than that. The activist "progressive" Keynesians vehemently and actively refuse to engage the obvious nature of human creativity, wealth creation and voluntary exchange. They are basically Stalinists of a slightly different breed, allowing the peasants a slightly longer leash.

Follow the dishonest and pathetic hair splitting of "Lord Keynes" and the MMT boys today. They just do not want to accept a world where people can and do create good lives and prosperity without the "help" of the meddling Keynesian bureaucrat/overseer diluting the funny money supply and creating government debt.

Bob Roddis, is there some type of jealousy between you and fans of Keynes or are you trying to troll? Stalinist is a harsh word for people who still want to maintain the capitalist system. What problem do you have with gradual equality and democracy?

They are basically Stalinists of a slightly different breed, allowing the peasants a slightly longer leash.

I believe that Keynesians are motivated by a perverse desire to control others. And like the "progressives" of the 30s and 40s, they defend the undefendable regardless of evidence or logic.

I've said it before and I'll say it again. There does not seem to be a single Keynesian in the entire galaxy that has any familiarity with even basic Austrian concepts or analysis. That does not stop the name-calling.

All that stuff sounds like pseudo common sense to me. Those evil Keynesians are trying to distort the market process, blah, blah, blah. The murderous progressives who want universal healthcare and better education are suddenly the bad guys. It's almost like a conspiracy theory!

There is no such thing as a "happy country" or a "sad country." These "happiness studies" engage in interpersonal utility comparisons, and those are impossible. Even an academic economist can tell you that.

According to the "happiness studies" that are used by the government of Maryland to push Gov. O'Malley's "Plan Maryland," Haiti is much happier than the USA,so I guess that it must have a great social welfare system or economy or something like that.

In looking at the Forbes article, I must admit to being surprised about Africa. After all, African countries have some of the world's highest tax rates and they have all sorts of laws on the books highly regulating businesses. And the governments there (especially Zimbabwe) print lots of money, which proves they are not "revenue constrained." One would think, at least according to the Keynesians, that these measures are vital to both happiness and a strong economy.

Wait!!!! According to the Forbes study, Ireland is "happier" than the USA. But that is impossible. Why? According to Paul Krugman, Ireland practices AUSTERITY!!!

And (as Bob Murphy pointed out), Ireland is not in a boom, and according to the Keynesians, the only way one deals with the logical fallout from the previous boom being unsustainable is to create another boom.

In addition to claiming that governments/central banks cannot blow asset bubbles, he now asserts that central bank bond buying has had no, repeat NO effect on yields whatsoever. He claims to be baffled by claims of a fed fuelled bond bubble. Any comments?

I just had a discussion with someone who was attempting to convince me that it is Private Debt that is the real danger to the USA. Not Public Debt. I suggested they were two sides of the same coin. Why would you not attempt to engage in debt if the fact that you do not engage in debt practices means that you lose purchasing power due to inflation?

So the best course of action is to engage in debt purchases or else you lose value in your currency due to inflation. They did not really have a response to this.

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).